This section was created by Content Works, Postmedia’s commercial content studio.

This content is sponsored by CFA Institute

Hostile offer for Rona still an option after Lowe's pulls friendly bid

Analysis: Whether U.S. retailer Lowe's returns with a hostile offer directed at shareholders, something analysts note it has never done in its 50-plus years as a corporation, depends on how badly and quickly it wants to expand in Canada

MONTREAL — U.S. home improvement retailer Lowe’s Cos. Inc. has abandoned its friendly chase for Canadian hardware chain Rona Inc. after failing to engage the Quebec company’s board in talks.

Whether it returns with a hostile offer directed at shareholders, something analysts note it has never done in its 50-plus years as a corporation, depends on how badly and quickly it wants to expand in Canada. Whether it succeeds in the end depends on winning political support for a takeover from the Quebec government.

Don’t bet on that.

[np-related]

The reason for Lowe’s interest is simple. After five years in Canada, the company only has 31 stores, and has struggled to expand to achieve critical mass. Like other U.S. firms such as Target Corp., it views Canada’s robust economy as fertile new ground to drive sales and boost profits as the U.S. economy sputters.

To grow, it could continue to open new stores on its own, which would take years. Alternatively it could buy the competition.

The competition in this case is Home Hardware, a private co-op owned by some 1,000 independent stores that would make a takeover extremely difficult; and Rona, a widely held hardware chain that just happens to have a lot of frustrated shareholders hungry for a payoff after enduring a share price paralyzed by five straight years of earnings declines. Rona’s management, led by chief executive Robert Dutton, has a turnaround plan that involves starting a new consumer-oriented website and closing or downsizing some big-box stores while shifting to a smaller retail concept called “proximity stores.”

“Our view is that Lowe’s will make a hostile bid before Rona is further along in the process of closing or shrinking in size the 20 big-box stores outside Quebec,” Mr. Howlett said in a research note. He expects a bid within three months.

Carol Levenson, a senior analyst at corporate bond research service Gimme Credit LLC, has a different view. She says going hostile is not the way Lowe’s does business and that doing so would prove exceedingly difficult.

“This does not mean that Lowe’s will give up on this,” she said. “My thinking is that by withdrawing its proposal (and watching Rona’s stock inevitably drop in response) Lowe’s is stirring the pot and trying to make something happen without actually pursuing a hostile bid.”

Lowe’s is not in a hurry, she said, adding that given its own execution problems and major merchandising initiatives, the company would be better off returning next fiscal year, perhaps with a sweetened friendly offer.

Rona shares closed Monday at $11.29, off $1.48, on the Toronto Stock Exchange, less than the $11.87 level they traded at before Lowe’s confirmed its interest on July 31. The price suggests investors don’t believe a deal will get done.

The biggest obstacle may be political. Quebec’s Parti Québécois government, which won the Sept.4 election with a minority of seats, has vowed to block a foreign takeover of Rona by using provincial pension fund Caisse de dépôt et placement du Québec.

“What shocks me the most is this apprehension we have” in protecting local champions, PQ leader Pauline Marois said Aug.9 during a news conference staged in a Rona store parking lot in Chicoutimi. “We’re talking about 30,000 [supplier] jobs linked to Rona. The day it’s bought by a U.S. company, they’ll buy their materials in China and India.”

Quebec’s Liberal Party, which will be the official opposition in the new government, also opposes Lowe’s taking over Rona.

The Caisse, Rona’s largest shareholder, disclosed July 31 that it upped its stake in the company to just over 17 million shares, representing 14.2% of the common equity. Regulatory filings show the pension fund manager bought another one million shares in August and September to take its stake above 18 million shares.

“The Caisse is a long-term investor [in Rona] and we are convinced that this company has considerable potential for improvement,” Caisse spokesman Maxime Chagnon said by email Monday. “By improving its performance, it will consolidate its position.”

Mr. Chagnon declined to elaborate on whether the Caisse is open to an ownership or management change at Rona. But his statement suggests it is willing to give Mr. Dutton’s turnaround plan a chance.

“We would therefore expect a certain level of shareholder support for a transaction, at an appropriate price,” said Ms. Nattel.

Lowe’s said in a statement that it continues to believe that a merger between Lowe’s and Rona “makes business sense and would create significant value.” The company withdrew its non-binding proposal because it wasn’t able to engage the Rona board in talks to pursue due diligence, not because of any political concerns, said a company official.